Iron ore plunges below $US100

THE iron ore price's slide below the $US100 a tonne mark has sent nerves jangling from the Pilbara to Canberra.

The last time the commodity was that low was in September 2012.

The dramatic fall back then took markets by surprise, but this time was more expected as investment banks have slashed price forecasts for the commodity in the past month.

The situation is being partly blamed on the fact that the world's four largest iron ore miners have dramatically expanded, bringing on hundreds of millions of tonnes of new supply while China's economy is slowing.

The Bureau of Resources and Energy Economics' prediction of a 35 per cent lift to $76 billion this year is now looking unlikely.

Treasury's forecast last week of falls to $US90 a tonne by next year look correct, which would hit what the federal government says is a budget in crisis.

Deloitte Access Economics economist Chris Richardson warned that every dollar the iron ore price sheds hits national income by $800 million and the tax take by $300 million.

The spot price dropped $US2.20 to $US98.50 overnight, meaning it has now fallen about 26 per cent this year.

Analysts have abandoned iron ore, with UBS, JP Morgan and Credit Suisse among those to downgrade their price forecasts.

Goldman Sachs is among the most bearish, predicting prices to hit $US80 a tonne next year.

"We think this is a structural decline in prices rather than anything short-lived," analyst Craig Sainsbury told AAP.

"There is an over-supply in the industry at the moment, therefore prices are suffering in what's also a reasonably low growth steel environment in China at the moment."

He thought Fortescue Metals had reason to be nervous, given its margins are slimmer than the other large producers, but did not expect a crisis as occurred during the 2012 price collapse that brought it to the brink.

Fortescue Metals shares actually shot up on Tuesday, rebounding from a 23 per cent plunge since April 9.

It announced a major increase in the size of its Greater Solomon resource.

IG market strategist Evan Lucas believes the pessimism about China was overplayed, with demand for steel products and growth strong.

While spot prices were low, futures contracts for September on China's Dalian exchange were still a healthy $US114 a tonne, he said.

"Come September they still believe and are happy to buy iron ore at $US114 a tonne," he told AAP.

He argued it was very difficult to predict iron ore prices beyond this year, given China's government might stimulate its economy and part of the current over-supply was due to a lack of disruptions in a recent mild Pilbara cyclone season.